The Treasury Department and IRS have finalized regulations regarding the deduction of up to $10,000 in personal car loan interest by individuals for tax years 2025 through 2028. This includes regulations on information returns required to be filed by a lender or other person engage in a trade or business who receives $600 or more of qualified interest during the calendar year. The final regulations adopt the proposed regulations published in January 2026 (NPRM REG-113515-25) with some changes in response to public comments.

The Treasury Department and IRS have finalized regulations regarding the deduction of up to $10,000 in personal car loan interest by individuals for tax years 2025 through 2028. This includes regulations on information returns required to be filed by a lender or other person engage in a trade or business who receives $600 or more of qualified interest during the calendar year. The final regulations adopt the proposed regulations published in January 2026 (NPRM REG-113515-25) with some changes in response to public comments.

Qualified Personal Vehicle Loan Interest

For tax years beginning in 2025 through 2028, a noncorporate taxpayer may claim a deduction of up to $10,000 for qualified personal vehicle loan interest (QPVLI) paid or accrued during the tax year on a specified passenger vehicle loan (SPVL) incurred by the taxpayer for the purchase of an applicable personal vehicle (APV) for personal use. Generally, interest includes an amount paid, received, or accrued as compensation for the use or forbearance of money under the debt instrument.

The final regulations clarify that QPVLI also includes prepaid interest in the form of points and deferred or capitalized interest. In addition, it may include origination-related or financing-related charges, prepayment penalties, late-payment charges, default-related charges, and similar fees, if characterized as an interest expense for federal income tax purposes.

Secured by First Lien

Interest is QPVLI only if it is paid or accrued on debt for the purchase of an APV for personal use that is secured by a first lien. The final regulations clarify that an SPVL is secured by a first lien with the first voluntary security interest recorded against the vehicle. Any involuntary liens are disregarded even if given temporary higher priority at a later date.

A vehicle also may be considered secured by a first lien even if the lien has not yet been perfected or recorded due to short-term delays arising under State or local law. It may also be considered secured by a first lien where the lien is removed in connection with the taxpayer no longer owning the vehicle, but the taxpayer continues to be liable for the loan (repossession or insurance payout).

Purchase of Applicable Passenger Vehicle

An SPVL is qualified only to the extent the debt is incurred for the purchase of a new vehicle and any other items or amounts customarily financed in the same purchase transaction (for example, vehicle service plans, extended warranties, sales taxes, and vehicle-related fees). Any portion of a loan for items or amounts not customarily financed in the purchase are not qualified.

The taxpayer must allocate the debt on a pro rata basis. Whether items are customarily financed and directly related to the purchase of the vehicle is determined on an industry-wide basis and not on the particular financing terms. The final rules, however, expand the list of examples of items customarily financed in an APV purchase. The final regulations also maintain that debt incurred for negative equity in a prior purchased vehicle is not incurred for the purchase of an APV.

The requirement that an APV must be a new vehicle under the loan documentation refers to the lender’s classification of the vehicle for purposes of its financing programs. The original use of the vehicle must commence with the taxpayer. However, original use does not commence with a dealer if the vehicle is held primarily for sale to customers in the ordinary course of its trade or business. Original does not commence with a lessee if the lessee purchases the vehicle during or at the end of the lease term.

Information Reporting

Any lender or other person who, in the course of that trade or business, receives from any individual interest aggregating $600 or more for any calendar year on an SPVL, must report the receipt of interest on Form 1098-VLI to the IRS and the payee. The final regulations affirm that lenders are required to include only interest received on an SPVL for the purchase of an APV, the first use of which begins with the payee. This is required by statute and may require the lender to collect information it currently does not collect. The lender must file Form 1098-VLI for each SPVL.

T.D. 10054

The Treasury Department and IRS have issued proposed regulations providing that a private school is not eligible for Federal income tax exemption under section 501(c)(3) if it considers race, color, or national or ethnic origin in any of its educational, admissions, scholarship, athletic, or other school-administered policies. Any such consideration, under the proposed regulation subsection, would be considered de facto racial discrimination. The proposed rules would apply to taxable years beginning after May 31, 2027.

The Treasury Department and IRS have issued proposed regulations providing that a private school is not eligible for Federal income tax exemption under section 501(c)(3) if it considers race, color, or national or ethnic origin in any of its educational, admissions, scholarship, athletic, or other school-administered policies. Any such consideration, under the proposed regulation subsection, would be considered de facto racial discrimination. The proposed rules would apply to taxable years beginning after May 31, 2027.

Racial Nondiscrimination

The proposed regulations would treat all race-based consideration in private education as contrary to a fundamental public policy, regardless of its purpose, including remedial or diversity-related objectives. This restriction does not inclulde policies or actions designed to eliminate prejudice or other forms of discrimination. The rules would cover private primary and secondary schools, colleges, professional or trade schools, and universities. The rules specifically do not include governmental units, any agency or instrumentality of a governmental unit, or any organization owned or operated by such an agency or instrumentality.

Application to Private Schools

To qualify for tax exemption, a private school could not consider race, color, or national or ethnic origin in:

• (1) Educational or admissions policies
• (2) Scholarship or loan programs
• (3) Athletic or other school-supported programs

The proposal would not prevent religious schools from maintaining religious missions or selecting students based solely on religious affiliation. If finalized, Rev. Proc. 75-50 would also be modified to remove provisions permitting certain race-based preferences for minority groups.

The proposed regulations would add §1.501(c)(3)-2 and apply to taxable years beginning after May 31, 2027.

Proposed Regulations, NPRM REG-119986-25

IR 2026-103

A Notice of Final Partnership Adjustment (FPA) issued by the IRS to a partnership was timely under Code Sec. 6235 because the partnership and IRS had agreed to extend the limitations period for making partnership adjustments. It was determined that the extended period under Code Sec. 6235(a)(1) controlled because the statute permits adjustments until the latest of the periods specified in Code Sec. 6235(a). Accordingly, the partnership’s motion for summary judgment was denied.

A Notice of Final Partnership Adjustment (FPA) issued by the IRS to a partnership was timely under Code Sec. 6235 because the partnership and IRS had agreed to extend the limitations period for making partnership adjustments. It was determined that the extended period under Code Sec. 6235(a)(1) controlled because the statute permits adjustments until the latest of the periods specified in Code Sec. 6235(a). Accordingly, the partnership’s motion for summary judgment was denied.

The partnership, which was subject to the centralized partnership audit (CPA) regime, challenged an FPA disallowing a charitable contribution deduction. The partnership argued that the FPA was issued outside the applicable limitations period because the 330-day period following the notice of proposed partnership adjustment had expired. However, the parties had previously executed an agreement extending the limitations period for partnership adjustments under Code Sec. 6235(b).

Further, it was concluded that the periods specified in Code Sec. 6235(a) were not sequential deadlines. The statutory phrase “later of” required use of the latest applicable period, and an agreed extension under Code Sec. 6235(b) extended the limitations period for making adjustments, including issuance of the FPA. Because the FPA was mailed before expiration of the agreed extended period, the FPA was timely.

Katanga Properties, LLC, 167 TC No. 10, Dec. 62,899

The Doug LaMalfa Federal Disaster Tax Relief Certainty Act has been signed into law by President Trump.

The Doug LaMalfa Federal Disaster Tax Relief Certainty Act has been signed into law by President Trump.

The law (H.R. 5366) allows victims of federally declared disasters to deduct qualified losses above $500 per disaster without itemizing and removes the 10 percent adjusted gross income threshold for those losses. A fact sheet on the bill can be found here.

Under the law, this treatment of personal casualty loss is available until Jan. 1, 2027.

It also excludes wildfire relief payments from taxable income regardless of when they are received, so long as the wildfire disaster declaration occurs after Dec. 31, 2014, and before Jan. 1, 2027.

President Trump signed the bill into law on Sept. 11, 2026.

The IRS has modified automatic accounting method change procedures for research or experimental expenditures and certain residential construction contracts. Rev. Proc. 2026-32 modifies sections 7 and 19 of Rev. Proc. 2025-23 to reflect changes made by the One, Big, Beautiful Bill Act (OBBBA).

The IRS has modified automatic accounting method change procedures for research or experimental expenditures and certain residential construction contracts. Rev. Proc. 2026-32 modifies sections 7 and 19 of Rev. Proc. 2025-23 to reflect changes made by the One, Big, Beautiful Bill Act (OBBBA).

For research expenditures, the procedure modifies accounting method changes under Code Secs. 174 and 174A. Code Sec. 174 continues to require capitalization and 15-year amortization for foreign research expenditures. Code Sec. 174A generally allows a current deduction for domestic research expenditures paid or incurred in tax years beginning after December 31, 2024.

The procedure also revises rules governing adjustments associated with accounting method changes. It coordinates certain Code Sec. 481 adjustments with the OBBBA transition method for recovering unamortized domestic research expenditures. It also extends through tax years beginning before 2028 waivers of certain eligibility restrictions for specified automatic changes.

Further, the IRS provides automatic accounting method changes for residential construction contracts affected by the OBBBA amendments to Code Sec. 460. Taxpayers may change from the percentage-of-completion method to an exempt contract method for qualifying contracts entered into in tax years beginning after July 4, 2025. Certain taxpayers may also change their treatment of costs under Code Sec. 263A.

The modified procedures generally apply to Form 3115, Application for Change in Accounting Method, filed after September 4, 2026. Special transition rules apply to certain previously filed Forms 3115.

Rev. Proc. 2026-32

Tax writers in Congress are set to begin debating and writing tax reform legislation. On September 27, the White House and GOP leaders in Congress released a framework for tax reform. The framework sets out broad principles for tax reform, leaving the details to the two tax-writing committees: the House Ways and Means Committee and the Senate Finance Committee. How quickly lawmakers will write and pass tax legislation is unclear. What is clear is that tax reform is definitely one of the top issues on Congress’ Fall agenda.

Tax writers in Congress are set to begin debating and writing tax reform legislation. On September 27, the White House and GOP leaders in Congress released a framework for tax reform. The framework sets out broad principles for tax reform, leaving the details to the two tax-writing committees: the House Ways and Means Committee and the Senate Finance Committee. How quickly lawmakers will write and pass tax legislation is unclear. What is clear is that tax reform is definitely one of the top issues on Congress’ Fall agenda.

Individuals

The GOP framework proposes consolidating the current seven individual tax rates into three: 12, 25 and 35 percent. However, the framework leaves open the possibility of an additional top rate “to the highest-income taxpayers to ensure that the reformed tax code is at least as progressive as the existing tax code and does not shift the tax burden from high-income to lower- and middle-income taxpayers.”

For individuals, the GOP framework also proposes to:

• Eliminate the alternative minimum tax
• Roughly double the standard deduction
• Repeal the federal estate tax
• Preserve the home mortgage interest deduction and the deduction for charitable contributions
• Eliminate most other itemized deductions
• Repeal the personal exemption for dependents
• Retain tax benefits that encourage work, higher education and retirement security

Family incentives

Family incentives have traditionally garnered bipartisan support in Congress and the GOP framework includes several. The child tax credit, for example, currently phases out when incomes reach certain levels. The GOP framework calls for increasing the income levels for the credit to unspecified amounts.   Another proposal would create a new non-refundable $500 credit for non-child dependents. The details would be left to the tax-writing committees.

Businesses

One pillar of the GOP framework is a corporate tax rate cut. The framework calls for a 20 percent corporate tax rate, down from the current 35 percent rate. Businesses that operate as passthroughs, such as S corporations, would have a maximum tax rate of 25 percent, subject to unspecified limitations to prevent abuses.

Other business proposals include:

• Enhanced expensing
• Limiting the deduction for net interest expenses by C corporations
• Eliminating the Code Sec. 199 deduction
• Preserving the research and development credit and tax preferences for low-income housing
• Reforming certain international taxation rules

Drafting legislation

After the GOP framework was released, the chairs of the tax writing committees said their committees would begin drafting legislation. The Ways and Means Committee is made up of 24 Republicans and 16 Democrats. Republicans also have a majority on the Senate Finance Committee but only by two votes (14 to 12). This narrow vote margin is likely to influence any tax bill out of the Senate Finance Committee. Our office will keep you posted of developments.

Extenders

A number of popular but temporary tax incentives have expired. Unless extended, these “extenders” will not be available to taxpayers when they file their 2017 returns in 2018. They include:

• Tax exclusion for canceled mortgage debt
• Mortgage insurance premium deductibility
• Higher education tuition deduction
• Special expensing rules for film, television, and theatrical productions
• Seven-year recovery period for motorsports entertainment complexes

Other tax bills

Several tax-related bills may be taken up by either the House or Senate, including:

• RESPECT Act, passed by the House and waiting for a vote in the Senate, would limit the IRS’s ability to seize assets related to structured transactions
• FY 2018 IRS budget bill, passed by the House and waiting for a vote in Senate, which would fund the IRS for FY 2018

Please contact our office if you have any questions about tax reform, the extenders or other tax bills.

Under a flexible spending arrangement (FSA), an amount is credited to an account that is used to reimburse an employee, generally, for health care or dependent care expenses. The employer must maintain the FSA. Amounts may be contributed to the account under an employee salary reduction agreement or through employer contributions.

Use-it or lose-it

The general rule is that no contribution or benefit from an FSA may be carried over to a subsequent plan year. Unused benefits or contributions remaining at the end of the plan year (or at the end of a grace period) are forfeited. This is known as the “use it or lose it” rule. The plan cannot pay the unused benefits back to the employee, and cannot carry over the unused benefits to the following calendar year.

Example. An employer maintains a cafeteria plan with a health FSA. The plan does not have a grace period. Arthur, an employee, contributes $250 a month to the FSA, or a total of $3,000 for the calendar year. At the end of the year (December 31), Arthur has incurred medical expenses of only $1,200 and makes claims for those expenses. He has $1,800 of unused benefits. Under the “use it or lose it” rule, Arthur forfeits the $1,800. 

Grace period

Because the “use it or lose it” rule seemed harsh, the IRS gave employers the option to provide a grace period at the end of the calendar year. The grace period may extend for 2½ months, but must not extend beyond the 15^th day of the third month following the end of the plan year. Medical expenses incurred during the grace period may be reimbursed using contributions from the previous year.

Example. Beulah contributes $3,000 to her health FSA for 2010. The FSA is on January 1 through December 31 calendar year.  On December 31, 2010, Beulah has $1,800 of unused contributions. Her employer provides a grace period through March 15, 2011. On January 20, 2011, Beulah incurs $1,500 of additional medical expenses. Because these expenses were incurred during the grace period, Beulah can be reimbursed the $1,500 from her 2010 contributions. On March 15, 2011, she has $300 of unused benefits from 2010 and forfeits this amount.

Exceptions

There are other exceptions to the prohibition against deferred compensation within the operation of an FSA. A cafeteria plan is permitted, but not required, to reimburse employees for orthodontia services before the services are provided, even if the services will be provided over a period of two years or longer. The employee must be required to pay in advance to receive the services. 

Another exception is provided for durable medical equipment that has a useful life extending beyond the health FSA’s period of coverage (the calendar year, plus any grace period). For example, a health FSA is permitted to reimburse the cost of a wheelchair for an employee.

If you have any questions on setting up an FSA, whether as an employer or an employee, and which benefits must be covered and which are optional, please do not hesitate to call this office.

Whether a parent who employs his or her child in a family business must withhold FICA and pay FUTA taxes will depend on the age of the teenager, the amount of income the teenager earns and the type of business.

FICA and FUTA taxes

A child under age 18 working for a parent is not subject to FICA so long as the parent's business is a sole proprietorship or a partnership in which each partner is a parent of the child (if there are additional partners, the taxes must be withheld). FUTA does not have to be paid until the child reaches age 21. These rules apply to a child's services in a trade or business.

If the child's services are for other than a trade or business, such as domestic work in the parent's private home, FICA and FUTA taxes do not apply until the child reaches 21.

The rules are also different if the child is employed by a corporation controlled by his or her parent. In this case, FICA and FUTA taxes must be paid.

Federal income taxes

Federal income taxes should be withheld, regardless of the age of the child, unless the child is subject to an exemption. Students are not automatically exempt, though. The teenager has to show that he or she expects no federal income tax liability for the current tax year and that the teenager had no income tax liability the prior tax year either. Additionally, the teenager cannot claim an exemption from withholding if he or she can be claimed as a dependent on another person's return, has more than $250 unearned income, and has income from both earned and unearned sources totaling more than $800.

Bona fide employee

Remember also, that whenever a parent employs his or her child, the child must be a bona fide employee, and the employer-employee relationship must be established or the IRS will not allow the business expense deduction for the child's wages or salary. To establish a standard employer-employee relationship, the parent should assign regular duties and hours to the child, and the pay must be reasonable with the industry norm for the work. Too generous pay will be disallowed by the IRS.

If you pay for domestic-type services in your home, you may be considered a "domestic employer" for purposes of employment taxes. As a domestic employer, you in turn may be required to report, withhold, and pay social security and Medicare taxes (FICA taxes), pay federal unemployment tax (FUTA), or both.

The tax on household employees is often referred to as "the nanny tax." However, the "nanny tax" isn't confined to nannies. It applies to any type of "domestic" or "household" help, including babysitters, cleaning people, housekeepers, nannies, health aides, private nurses, maids, caretakers, yard workers, and similar domestic workers. Excluded from this category are self-employed workers who control what work is done and workers who are employed by a service company that charges you a fee.

Who is responsible

Employers are responsible for withholding and paying payroll taxes for their employees. These taxes include federal, state and local income tax, social security, workers' comp, and unemployment tax. But which domestic workers are employees? The housekeeper who works in your home five days a week? The nanny who is not only paid by you but who lives in a room in your home? The babysitter who watches your children on Saturday nights?

In general, anyone you hire to do household work is your employee if you control what work is done and how it is done. It doesn't matter if the worker is full- or part-time or paid on an hourly, daily, or weekly basis. The exception is an independent contractor. If the worker provides his or her own tools and controls how the work is done, he or she is probably an independent contractor and not your employee. If you obtain help through an agency, the household worker is usually considered their employee and you have no tax obligations to them.

What and when you need to pay

If you pay cash wages of $1,700 or more in 2009 to any one household employee, then you must withhold and pay social security and Medicare taxes (FICA taxes). The taxes are 15.3 percent of cash wages. Your employee's share is 7.65 percent (you can choose to pay it yourself and not withhold it). Your share is a matching 7.65 percent.

If you pay total cash wages of $1,000 or more in any calendar quarter of 2008 or 2009 to household employees, then you must pay federal unemployment tax. The tax is usually 0.8 percent of cash wages. Wages over $7,000 a year per employee are not taxed. You also may owe state unemployment tax.

The $1,700 threshold

If you pay the domestic employee less than $1,700 (an inflation adjusted amount applicable for 2009), in cash wages in 2009, or if you pay an individual under age 18, such as a babysitter, irrespective of amount, none of the wages you pay the employee are social security and Medicare wages and neither you nor your employee will owe social security or Medicare tax on those wages.You need not report anything to the IRS.

If you pay the $1,700 threshold amount or more to any single household employee (other than your spouse, your child under 21, parent, or employee who under 18 at any time during the year) then you must withhold and pay FICA taxes on that employee. Once the threshold amount is exceeded, the FICA tax applies to all wages, not only to the excess.

As a household employer, you must pay, at the time you file your personal tax return for the year (or through estimated tax payments, if applicable), the 7.65 percent "employer's share" of FICA tax on the wages of household help earning $1,700 or more. You also must remit the 7.65 percent "employee's share" of the FICA tax that you are required to withhold from your employee's wage payments. The total rate for the employer and nanny's share, therefore, comes to 15.3 percent.

Withholding and filing obligations

Most household employers who anticipate exceeding the $1,700 limit start withholding right away at the beginning of the year. Many household employers also simply absorb the employee's share rather than try to collect from the employee if the $1,700 threshold was initially not expected to be passed. Domestic employers with an employee earning $1,700 or more also must file Form W-3, Transmittal of Wage and Tax Statements, and provide Form W-2 to the employee.

Household employers report and pay employment taxes on cash wages paid to household employees on Form 1040, U.S. Individual Income Tax Return, Schedule H, Household Employment Taxes. These taxes are due April 15 with your regular annual individual income tax return. In addition, FUTA (unemployment) tax information is reported on Schedule H. If you paid a household worker more than $1,000 in any calendar quarter in the current or prior year, as an employer you must pay a 6.2 percent FUTA tax up to the first $7,000 of wages.

Household employers must use an employer identification number (EIN), rather than their social security number, when reporting these taxes, even when reporting them on the individual tax return. Sole proprietors and farmers can include employment taxes for household employees on their business returns. Schedule H is not to be used if the taxpayer chooses to pay the employment taxes of a household employee with business or farm employment taxes, on a quarterly basis.

Deciding who is an employee is not easy. If you have any further questions about how to comply with the tax laws in connection with household help, please feel free to call this office.

With all the different tax breaks for taxpayers with children - from the Earned Income Tax Credit (EITC) to the dependent care and child tax credits - you may be wondering who exactly is a "child" for purposes of these incentives. Is there a uniform definition in the Tax Code, or does the definition of a "child" vary according to each tax break?

Generally, a qualifying child for purposes of each tax break requires four tests to be met: relationship, age, residency, and citizenship. This article discusses the definition of "child" for purposes of the EITC, dependent care credit, child tax credit, and dependency exemption.

Child Tax Credit

The child tax credit provides eligible individuals to take an income tax credit of $1,000 for each qualifying child under the age of 17 at the end of the calendar year. The child tax credit is refundable for some taxpayers, but is phased-out for higher-income taxpayers. For purposes of the child tax credit, a qualifying "child" is a child who:

-- Is under the age of 17 at the close of the calendar year;

-- Is your son, daughter, stepson, stepdaughter; foster child; legally adopted child or child placed with your for legal adoption; brother, sister, stepbrother, stepsister, or foster child placed with you by an authorized placement agency or court order; or descendant of any such person;

-- Lives with you for more than half of the tax year; and

-- Is a U.S. citizen, U.S. resident or U.S. national.

Child and Dependent Care Credit

Taxpayers who incur expenses to care for a child under the age of 13 (or for an incapacitated dependent or spouse) in order to work or look for work can claim the child and dependent care credit, which equals 20 percent to 35 percent of employment-related expenses. Both dollar and earned income limits on creditable expenses apply. For purposes of the child and dependent care credit, a qualifying "child" is generally a child who:

-- Is under the age of 13 when the care was provided;

-- Lives with you for more than half of the tax year;

-- Is your son, daughter, stepson, stepdaughter; foster child; legally adopted child or child placed with your for legal adoption; brother, sister, stepbrother, stepsister, or foster child placed with you by an authorized placement agency or court order; or descendant of any such person; and

-- Did not provide more than half of his or her own support for the year.

Earned Income Tax Credit

Eligible lower-income taxpayers with earned income can qualify for the refundable Earned Income Tax Credit (EITC). The credit is phased in as earned income increases, and phased out after earned income exceeds the applicable ceiling. The ceilings and thresholds vary based on the number of the taxpayer's qualifying children. A qualifying "child" for purposes of the EITC is generally a child who:

-- Is under the age of 19, under the age of 24 if a full time-student, at the end of the year;

-- Is your son, daughter, stepson, stepdaughter; foster child; legally adopted child or child placed with your for legal adoption; brother, sister, stepbrother, stepsister, or foster child placed with you by an authorized placement agency or court order; or descendant of any such person; and

-- Lived with you in the U.S. for more than half of the year.

Dependency Exemption

For purposes of the dependency exemption, a qualifying child is generally a child who:

-- Is under the age of 19, or under age 24 if a full-time student, at the end of the year;

-- Is your son, daughter, stepson, stepdaughter; foster child; legally adopted child or child placed with your for legal adoption; brother, sister, stepbrother, stepsister, or foster child placed with you by an authorized placement agency or court order; or descendant of any such person;

-- Lived with you with you for more than half of a year; and

-- Did not provide more than half of his or her own support for the year.

If you have questions about any of these tax breaks, please call our office. We can help determine if you are eligible for these and other tax incentives related to your children.

The American Jobs Creation Act of 2004 (2004 Jobs Act) changed the rules for start-up expenses in both favorable and unfavorable ways. Start-up expenditures are amounts that would have been deductible as trade or business expenses, had they not been paid or incurred before the business began. Prior to the 2004 Jobs Act, a taxpayer had to file an election to amortize start-up expenditures over a period of not less than 60 months, no later than the due date for the tax year in which the trade or business begins.

Effective for amounts paid or incurred after October 22, 2004, the new law allows taxpayers to elect to deduct up to $5,000 of start-up expenditures in the tax year in which their trade or business begins. The $5,000 amount must be reduced (but not below zero) by the amount by which the start-up expenditures exceed $50,000. The remainder of any start-up expenditures, those that are not deductible in the year in which the trade or business begins, must be ratably amortized over the 180-month period (15 years) beginning with the month in which the active trade or business begins. Similar rules apply to organizational expenses incurred by corporations.

Partnerships may also elect to deduct up to $5,000 of their organizational expenditures, reduced by the amount by which such expenditures exceed $50,000, for the tax year in which the partnership begins business. The remainder of any organizational expenses can be deducted ratably over the 180-month period beginning with the month in which the partnership begins business.

The new provision benefits smaller businesses that have around $5,000 of start-up or organizational expenditures. Larger start-ups, however, will now be required to amortize most or all of these expenses over 15 years rather than the five-year period provided under the prior rules.

In certain cases, tax planning may be useful in defining a new line of business as the continuation of any existing business rather than the start of a new business. In other situations, getting an immediate $5,000 write off is the best possible scenario. If you are thinking of starting a new business or a new business undertaking, this office may be able to help you structure your start-up expenses in the best possible tax situation.

Most homeowners have found that over the past five to ten years, real estate -especially the home in which they live-- has proven to be a great investment. When the 1997 Tax Law passed, most homeowners assumed that the eventual sale of their home would be tax free. At that time, Congress exempted from tax at least $250,000 of gain on the sale of a principal residence; $500,000 if a joint return was filed. Now, those exemption amounts, which are not adjusted for inflation, don't seem too generous for many homeowners.

What can be done?

Keeping lots of receipts is one answer! Remember, it will be the gain on your home that is potentially taxable, not full sale price. Gain is equal to net sales price minus an amount equal to the price you paid for your house (including mortgage debt) plus the cost of any improvements made over the years. Bottom line: If your residence has gain that will otherwise be taxed, you will get around 30 percent back on the cost of the improvements (assume your tax bracket is about 30 percent when you sell), simply by keeping good records of those improvements.

The basis of your personal residence is generally made up of three basic components: original cost, improvements, and certain other basis adjustments

How your home was acquired will need to be considered when determining its original cost basis.

Purchase or Construction. If you bought your home, your original cost basis will generally include the purchase price of the property and most settlement or closing costs you paid. If you or someone else constructed your home, your basis in the home would be your basis in the land plus the amount you paid to have the home built, including any settlement and closing costs incurred to acquire the land or secure a loan.

Gift. If you acquired your home as a gift, your basis will be the same as it would be in the hands of the donor at the time it was given to you.

Inheritance. If you inherited your home, your basis is the fair market value on the date of the deceased's death or on the "alternate valuation" date, as indicated on the federal estate tax return filed for the deceased.

Divorce. If your home was transferred to you from your ex-spouse incident to your divorce, your basis is the same as the ex-spouse's adjusted basis just before the transfer took place.

If you've been in your home any length of time, you most likely have made some home improvements. These improvements will generally increase your home's basis and therefore decrease any potential gain on the sale of your residence. Before you increase your basis for any home improvements, though, you will need to determine which expenditures can actually be considered improvements versus repairs.

An improvement materially adds to the value of your home, considerably prolongs its useful life, or adapts it to new uses. The cost of any improvements cannot be deducted and must be added to the basis of your home. Examples of improvements include putting room additions, putting up a fence, putting in new plumbing or wiring, installing a new roof, and resurfacing your patio. It doesn't need to be a big project, however, just relatively permanent. For example, putting in a skylight or a new kitchen sink qualifies.

Repairs, on the other hand, are expenses that are incurred to keep the property in a generally efficient operating condition and do not add value or extend the life of the property. For a personal residence, these costs do not add to the basis of the home. Examples of repairs are painting, mending drywall, and fixing a minor plumbing problem.

Additional items that will increase your basis include expenditures for restoring damaged property and assessing local improvements. Some common decreases to your home's basis are:

• Insurance reimbursements for casualty losses.
• Deductible casualty losses that aren't covered by insurance.
• Payments received for easement or right-of-way granted.
• Deferred gain(s) on previous home sales before 1998.
• Depreciation claimed after May 6, 1997 if you used your home for business or rental purposes.

In order to document your home's basis, it is wise to keep the records that substantiate the basis of your residence such as settlement statements, receipts, canceled checks, and other records for all improvements you made. Good records can make your life a lot easier if the IRS ever questions your gain calculation. You should keep these records for as long as you own the home. Once you sell the home, keep the records until the statute of limitations expires (generally three years after the date on which the return was filed reporting the sale).